KUALA LUMPUR: CGS International said downside risks to the ringgit remain as it may have overextended itself due to its sharp movements.
It projects the ringgit to end the year at RM4.40 against the US dollar and rise to RM4.20 at end-2025.
The firm said there is still momentum for both consumption and investments to sustain the ringgit until 2025.
"Also, Bank Negara Malaysia is perhaps the only regional central bank which could turn hawkish, in our view. That said, current ringgit strength may have been overextended due to its sharp movements, which we think poses downside risks," it said in a note.
The firm said the recent movements in Asean currencies were due to risks of a US-led economic recession, driven in part by what was perceived as overbought fears based on very few indicators.
The US Federal Reserve (Fed) has signalled a rate cut and the market expects it to be as soon as the next meeting on September 24.
"From then on, we think dovish calls will remain where we are pricing in the possibility that the US will reach a terminal rate of 3.0 per cent by the start of 2026, implying a 150 basis point (bp) cut next year on top of 75 bp cuts this year."
It added the expectations of a narrowing interest rate differential with the US could favour the appreciation of Asean currencies, especially given that the latter were battered by the mighty US dollar from 2022.
"We also think there are few additional factors to support more appreciation of regional currencies ahead, including Asean to exhibit a relatively sustainable balance of payments position, Trump's rhetoric for a weaker dollar and low foreign shareholding providing strong upside if domestic growth outlook improves," it added.
Downside for regional currencies may stem from excessive appreciation due to central banks' preferences to build back reserves that were lost since 2022, high Asean currency correlation with Chinese Yuan which ties currency movements China's economic outlook; and distant but possible black swan events which include the US falling into deep recession or heightened trade wars.